American Airlines CFO on fixing balance sheet after pandemic

Aug 8, 2022, 6:43 AM | Updated: Aug 9, 2022, 6:39 am

FORT WORTH, Texas (AP) — Derek Kerr might have the hardest job in the airline business.

Kerr is the chief financial officer of American Airlines, and his task is to fix a balance sheet that has been battered by borrowing needed to survive the pandemic.

American has the most debt among all U.S. airlines, more than $36 billion. The airline is trying to fly through a bumpy recovery in travel during which revenue is rising but so are costs like fuel and labor.

Kerr spoke recently to The Associated Press. The answers have been edited for length.

Q. American is coming off its first profitable quarter, excluding government aid, since the pandemic started. Planes are packed. What’s going to happen to revenue after Labor Day, when leisure travel slows down?

A. Leisure is really, really strong. Small business is back 100% also, because those businesses had to survive, they are out flying. Corporate business is back about 65%, 75%. As we look out at bookings … we don’t see any huge change from a revenue standpoint as we go forward.

Q. Spot prices for jet fuel prices have eased in the last couple of months, but they’re still double the price before the pandemic. Why doesn’t American hedge against fuel spikes like Southwest does?

A. Hedging is insurance. It’s very expensive, and you can’t insure your entire portfolio of fuel. The airline industry is the No. 2 user of fuel. If we all hedged fuel, we’d move the fuel price and actually drive the fuel price up. Plus you put a risk on the company (if oil prices fall). And then the last thing is you have a natural hedge today — as fuel increases, the industry can raise revenues. We have passed on pretty much the fuel increases that are out there.

Q. American predicts nonfuel costs in the third quarter will be up 12% to 14% compared with the third quarter of 2019 on a per seat, per mile basis. Can you get costs under control?

A. It’s not necessarily a cost issue, it’s a utilization of the fleet issue. If we flew our entire fleet, that (cost per seat per mile) would only be up about 2%. We’ve built these airlines, from a cost perspective, to fly more, and we’re not flying more because of the resources that we need to do that.

Q. How will you fly more? Do you need more pilots?

A. There is a pilot shortage at the (regional airlines) because the mainline carriers (like American, Delta and United) hire from the regionals. We’ll continue to work through that. That may take a couple of years to resolve itself. At the mainline, it’s more about a throughput of training. We can bring the pilots on, we have to get them through training. I hope by the beginning of next year, middle of next year, we’ll work through that and we’ll be able to have the whole mainline fleet up.

Q. When will your profit margins return to pre-pandemic levels?

A. It’s actually the same answer, because obviously that growth will come back at a much cheaper cost because the costs are already here. That will improve the margins over time.

Q. You’ve got $15.6 billion in liquidity. When are you going to use that to pay down debt?

A. Right now we’re going to hold on to that liquidity until we feel like we’ve totally turned the corner. We did have one profitable quarter. That’s awesome, it’s great, I’m proud of everybody here that that worked to get to that point, but we need to sustain that. We are going to take ($15.6 billion of liquidity) down into the $10 (billion) to $12 billion range at some point in time — just not ready to do that yet, but hopefully pretty soon.

Q. Can you refinance your debt with interest rates rising?

A. We’re in really good shape that we don’t have any debt that has come due. We paid off the $750 million unsecured (senior notes that matured in June). Our next big payment is a $1.2 billion term loan (for work at Reagan National and LaGuardia airports) that comes due at the end of next year. The second thing we have to do is finance aircraft. Every aircraft we have is financed through the end of the third quarter. We’re working hard to finance the back half of the year, and there are a lot of good proposals out there, even in a rising interest environment.

Q. Where do you find sources for financing planes?

A. We can do commercial banks. We can do market EETCs (publicly traded securities called enhanced equipment trust certificates). The market for EETCs is open still right now. It’s probably at 100 or 200 basis points bigger than what we have done in the past, but that’s still very attractive financing in this environment.

Q. Is an equity raise on the table?

A. It is not on the table right now. We have enough liquidity to make it through any downturn.

Q. What about share repurchases when the prohibition (a condition of federal pandemic aid) expires Sept. 30?

A. There is no plan to do any share repurchases. All of our excess liquidity will go to pay off debt.

Q. How would a recession change how you manage American’s finances?

A. If it does impact revenues, we would hold on to liquidity longer than than we have. It doesn’t mean that we’re not going to hit our $15 billion number (the target for debt reduction by the end of 2025). It might mean that we don’t accelerate paydown of that debt. But I’m fully confident with the liquidity we have at $15.6 billion that if there is a recessionary environment, that we will be able to withstand anything like that.

Q. American’s stock is being shorted much more often than the shares of Delta, United or Southwest. Why are those investors betting, in effect, that the stock price is going to fall?

A. It doesn’t concern me, but it’s really driven by the balance sheet and the differences between the airlines. We need to continue to make profits. We need to continue to stay on the plan that we’re on, return the airline to profitability, return the reliability of the airline, and everything will take care of itself.

Q. You were the CFO at America West right after 9/11, at US Airways during the airline downturn in the 2008 financial crisis, and at American since late 2013. For the airline business, how does the pandemic compare with those earlier crises?

A. This COVID time has been the hardest of all the times. A recession is one thing, where revenues go down 5% or 10%. When you get to a situation where you have zero receipts and you don’t know when you’re going to get out of this, that was the toughest time.

Q. Could American have survived without the federal aid?

A. American had negative receipts in the month of April 2020. You are refunding more money going out the door than you have coming in. It’s like nothing we’ve ever seen. It would have been really hard for all of us to make it through that.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


(Facebook Photo/City of San Luis, Arizona)...
Associated Press

San Luis authorities receive complaints about 911 calls going across border

Authorities in San Luis say they are receiving more complaints about 911 calls mistakenly going across the border.
4 days ago
(Pexels Photo)...
Associated Press

Daylight saving time begins in most of US this weekend

No time change is observed in Hawaii, most of Arizona, Puerto Rico, the U.S. Virgin Islands, American Samoa, Guam and the Northern Marianas.
12 days ago
Mexican army soldiers prepare a search mission for four U.S. citizens kidnapped by gunmen in Matamo...
Associated Press

How the 4 abducted Americans in Mexico were located

The anonymous tip that led Mexican authorities to a remote shack where four abducted Americans were held described armed men and blindfolds.
12 days ago
Tom Brundy points to a newly built irrigation canal on one of the fields at his farm Tuesday, Feb. ...
Associated Press

Southwest farmers reluctant to idle farmland to save water

There is a growing sense that fallowing will have to be part of the solution to the increasingly desperate drought in the West.
19 days ago
A young bison calf stands in a pond with its herd at Bull Hollow, Okla., on Sept. 27, 2022. The cal...
Associated Press

US aims to restore bison herds to Native American lands after near extinction

U.S. officials will work to restore more large bison herds to Native American lands under a Friday order from Interior Secretary Deb Haaland.
19 days ago
(Photo: OCD & Anxiety Treatment Center)...
Sponsored Content by OCD & Anxiety Treatment Center

Here's what you need to know about OCD and where to find help

It's fair to say that most people know what obsessive-compulsive spectrum disorders generally are, but there's a lot more information than meets the eye about a mental health diagnosis that affects about one in every 100 adults in the United States.

Sponsored Articles

Day & Night Air Conditioning, Heating and Plumbing

Company looking for oldest air conditioner and wants to reward homeowner with new one

Does your air conditioner make weird noises or a burning smell when it starts? If so, you may be due for an AC unit replacement.
(Pexels Photo)...

Sports gambling can be fun for adults, but it’s a dangerous game for children

While adults may find that sports gambling is a way to enhance the experience with more than just fandom on the line, it can be a dangerous proposition if children get involved in the activity.
(Photo via MLB's Arizona Fall League / Twitter)...
Arizona Fall League

Top prospects to watch at this year’s Arizona Fall League

One of the most exciting elements of the MLB offseason is the Arizona Fall League, which began its 30th season Monday.
American Airlines CFO on fixing balance sheet after pandemic